IRS revokes an animal-rescue organization's exemption for private inurement

Plain-English summary

An organization recognized under section 501(c)(3) conducted animal rescue, rehabilitation, education, and related public activities. The IRS found that its founder and president had sole control over the organization's finances and used organizational checks, a debit card, a vehicle, and other funds for personal or private-business expenses without adequate contemporaneous records. The examination also found commingled activities, numerous excess benefit transactions, no effective internal safeguards, incomplete correction, and insufficient records to verify the scope of exempt operations. The IRS concluded that substantial net earnings inured to the founder and that the organization failed to demonstrate operation exclusively for exempt purposes. It revoked exemption effective from the first audited year and stated that contributions were no longer deductible under section 170.

Ruling snapshot

• Question: Did private inurement, excess benefit transactions, and inadequate proof of exempt operations require revocation of the organization's section 501(c)(3) status?
• Outcome: revocation (exemption was revoked from the first audited year)
• Key authorities: IRC §§ 170, 501(c)(3), 4958; Treas. Reg. §§ 1.501(c)(3)-1, 53.4958-4

Full text (IRS public release)

Internal Revenue Service
Appeals Office
300 North Los Angeles Street
MS LA-8000 Room 3054
LOS ANGELES, CA 90012

Date: MAR 19 2020

Employer Identification Number:

Person to Contact:
****

Employee ID Number: ****

Tel: ****
Fax: ****

Release Date: 6/12/2020
UIL Index:

501.03-00

Certified Mail

Dear

This is a final adverse determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in Section 501(c)(3).
We hereby revoke the favorable determination letter to you dated August 27, 20 and you are no longer
exempt under Section 501(a) of the Code effective January 1, 20

We made the adverse determination for the following reason(s):

You operated in a manner whereby your net earnings inured to your founder and principal officer in
contravention of the exemption requirement for organizations described in section 501(c)(3) of the Code.
You failed to maintain contemporaneous records or otherwise demonstrate that your expenditures and
operations more generally were exclusively for charitable, educational, or other exempt purposes. This
revocation is effective on the first day of the first year we audited.

Contributions to your organization are not deductible under section 170 of the Code.

You're required to file Federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return,
or 1041, U.S. Income Tax Return for Estates and Trusts. Mail your form to the appropriate Internal
Revenue Service Center per the form’s instructions. You can get forms and instructions by visiting our
website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Code section 6110 after deleting certain identifying information. We have provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents
attached that show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in either:

• United States Tax Court,
• The United States Court of Federal Claims,
• The United States District Court for the District of Columbia.

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed
this determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate
forms for filing petitions for declaratory judgment. You can write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a
petition for declaratory judgment under section 7428 of the Code.

You also have the right to contact the Taxpayer Advocate Service (TAS). TAS is an independent
organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax
problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS.
Please contact the Taxpayer Advocate for the IRS office that issued this letter. If you qualify for TAS
assistance, which is always free, TAS will do everything possible to help you. Visit

www.taxpayeradvocate.irs.gov or call 877-777-4778.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process.
TAS cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to
file a petition in a United States Court.

If you have any questions, contact the person at the top of this letter.

Sincerely,

****

Appeals Team Manager

Date:
May 22, 2018
Taxpayer Identification Number:

Department of the Treasury
Internal Revenue Service
IRS Tax Exempt and Government Entities

Exempt Organizations Examinations
Form:

990-N
Tax Year(s) Ended:

Person to Contact:

Manager’s Contact Information:

Response Due Date:
June 21, 2018

CERTIFIED MAIL — Return Receipt Requested

Dear

Why you’re receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we
propose to revoke your tax-exempt status as an organization described in Internal Revenue
Code (IRC) Section 501(c)(3).

If you agree

If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and
return it to the contact person shown at the top of this letter. We'll issue a final adverse letter
determining that you aren't an organization described in IRC Section 501(c)(3) for the periods
above.

After we issue the final adverse determination letter, we'll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this

letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
send additional information as stated in 1 and 2, above, you'll still be able to file a protest
with IRS Appeals Office after the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a consent to extend the period of limitations for assessing tax. This is to allow the

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-

Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn’t apply now that we've issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
Government Entities) if you feel the issue hasn’t been addressed in published precedent
or has been treated inconsistently by the IRS.

If you’re considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal
to the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.

If we don't hear from you
If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll

issue a final adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can
help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a
hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you
qualify for TAS assistance, which is always free, TAS will do everything possible to help you.

Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

For additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at

www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).
If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

for Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018

2 Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

Department of the Treasury — Internal Revenue Service
Form 886-A (in lieu of)
Explanation of Items

ISSUE
Whether (the “EO”) 501(c)(3) tax-exempt status should be revoked because its
earnings inured to the benefit of its President .
FACTS
The State of endorsed the EO’s Articles of Incorporation on October 24, . Article II

of the EO’s Articles of Incorporation states that the corporation is a nonprofit Public Benefit
Corporation and is not organized for the private gain of any person. EO was organized under the
Nonprofit Public Benefit Corporation Law for both public purposes and public and charitable
purposes. The EO’s Articles states that the specific purpose of the corporation is to provide
education about domestic and wild animals. EO also rescues, rehabilitates and rehomes
unwanted or injured domestic and wild animals.

Revenue Agent secured (from the Secretary of State’s public website) a copy of the
EO’s Certificate of Amendment of Articles of Incorporation filed in the office of the Secretary of
State on September 22, . The amendment document states that Article 1 of EO’s original
governing instrument was amended, specifically the EO changed its name from
to . Article 2B of the EO original
Articles was also amended. The new provision states the following: The specific purpose of this
corporation is: Animal rescue and education, animal control, prevention of cruelty to animals.
Although the EO legally changed its name as indicated above, EO continues to use

. The IRS will update its records to reflect the EO’s current legal name.

The EO filed a Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code, on July 23, , post mark date. a.k.a.

put name down as the contact person on page one of the Form 1023, as authorized person on
behalf of the organization.

was listed as the President, in Part II, of the Form 1023. signed
page one of Form 1023 as authorized person on behalf the organization. One other officer is listed
in Part II. was shown as the EO’s Vice President.

In our letter dated August 27 , we determined the EO was exempt from federal income tax
under section 501(a) of the Code as an organization described in Section 501(c)(3). We further
determined that the EO was a publicly supported organization described under Code sections
509(a) (1) and 170(b)(1)(A)(vi).

www.irs.gov Page 1 of 12 Form 886-A (in lieu of)


For each of the tax years , the EO filed an annual IRS Form 990-N, Electronic
Notice (e-Postcard) for Tax-Exempt Organization not Required To File Form 990 or 990-EZ

was listed as the EO’s principal officer on both the and Form 990-N filings.
The EO filed a Form 990-EZ for the tax year and signed the return.

During the initial audit interview conducted on May 25, , stated that is the
EO’s founder, president and a member of the board of directors. Furthermore, has
held the position of president and has been a board member since the EO legally formed in
stated that was solely responsible for the operations and financial affairs of

the organization. During and , The EO maintained a checking account at

. The EO maintained a checking account and was the sole authorized user of
the EO’s bank debit card and had exclusive signature authority. made all bank
deposits.

disclosed on May 25, that in and , the EO had two additional
officers and board members. served as the EO’s Vice President and board
member and held the positions as Secretary and board member.
and have both since resigned from their respective positions with the
EO. As of the date of this report, stated that there are two officers (who are also
board members). continues to be the EO’s president and is the other
officer and board member). is the EO’s corporate secretary.

provided the following list of EO’s activities conducted in and
• Rescuing wild animals for release. Animals have included

• Sheltering rescued animals
• Paying for spay/neuter of animals
• Conducting wildlife presentations and exhibits at public events
• Creating and uploading animal rescue videos to YouTube
• Maintaining a Facebook page
• Responding to public emails and provided animal advice/help
• Participating in Adopt-a-pet events

stated that the current activities of the EO are nearly the same as they were in the
and years. The major change in activities since the end of is that the EO’s
sheltering of animals has drastically diminished because the EO had to move its facility.

Facilities:
stated that the EO rented (from through ) a 1-bedroom cabin/house
located at . The EO’s facility was also the

www.irs.gov Page 2 of 12 Form 886-A (in lieu of)


residence of . provided an unsigned lease agreement that listed
as the tenant. The lease agreement did not make any reference to the EO. stated
that the EO subleased the facility from ; did not submit any
documentation regarding any subleasing arrangement. Section 21 of the Residential Lease or
Month-To Month Rental Agreement submitted by reads, in part, as follows:

ASSIGNMENT; SUBLETTING: Tenant shall not sublet all or any part of Premises, or assign or
transfer this Agreement or any interest in it, without Landlord’s prior written consent. Section 13 of

Agreement reads: PETS: Unless otherwise provided in , no
animal or pet shall be kept on or about the Premises without Landlord’s prior written consent,
except: did not submit copies of any written consents pertaining to

Sections 21 and 13 of the lease/rental agreement.

made the following statement in faxed correspondence dated June 21,
! didn't collect rent from even though it took over all my yard, half of my garage

and rooms in the house. My monthly mortgage, insurance, utilities were
$ /month.
stated in faxed correspondence dated June 21, that the wildlife are
currently being housed with volunteers. further stated that does not personally house any

wildlife at house as does not want to give address to the United States Department of

Agriculture (USDA) and Fish and Wildlife. Furthermore, does not want to give the IRS (and

has refused to give, during the course of this audit) the address to current residence where
states that cares for the EO’s domestic animals, such as

Even though asked several times by agent and agent’s group manager, would not
provide the IRS with the addresses ( and volunteers) where states that the EO’s animals
are currently housed and cared for.

. Since the auditing agent has not been able to tour the EO’s places of business, the
agent has been unable to observe the EO’s daily business activities or physically verify the EO’s
non-cash assets, such as animal enclosures. We have only received verbal claims of the EO
rescuing and housing animals activities.

has only provided the IRS with the EO’s mailing address which is a post office box:

The EO’s Balance Sheet submitted by States that the volunteers buy and use
their own crates, food, some medications, pay veterinary bills for the animals in their possession.

www.irs.gov Page 3 of 12 Form 886-A (in lieu of)


Vehicles:
stated that personally owned a and that donated

that car to the EO. further stated that with the donation of the car came with a written
agreement. has indicated that currently neither nor the EO has a copy of the
written agreement. In EO’s correspondence dated June 21, ; stated that the
agreement allowed to retain the right to use the car for personal use. stated that
alone made this car use arrangement with the EO and . Additionally,
indicated that the agreement was for the use of future cars owned by EO.

stated the EO sold the vehicle and the proceeds from the sale of the
vehicle was used as a down payment for another car, namely a . The

was purchased in

The EO is the registered owner, per the Department Motor Vehicle, of the . On
June 5, ; submitted a faxed copy of a purchase agreement for the vehicle. The
purchase agreement entered on November 22, indicates that the buyer of the car is

. The purchase price of the car was $ . The contract indicates that
will make a down payment of $ and balance will be paid in monthly installments of $
The payments will continue until the sale price is paid in full.

stated that paid $ as an initial down payment for the and the EO
made two additional payments of $ and $ ; states that outstanding
balance (as of February ) due for the is $ ; further stated that the
certificate of owner is being held by the seller ( ) of the vehicle until the car is
paid in full.

stated that uses the EO’s car for personal use. further indicated.
in faxed correspondence dated June 21, that It is not eco-friendly to have a car for the
EO and a car for . Neither the EO nor maintained any contemporaneous
records regarding car usage between the EO and personal use.
used the EO’s bank debit card on numerous occasions to purchase gas for the car; however,
does not have receipts or contemporaneous records documenting whether the purchase of gas

was for personal use or for the EO’s exempt purpose.

Loans:

When agent asked during the interview conducted on May 25, about any
loans, stated that there were no loans, to or from the organization during the years
through . However, in submitted correspondence dated June 21, ,

states, in part the following:
Previously | was keeping a running tally of all that | loaned to

www.irs.gov Page 4 of 12 Form 886-A (in lieu of)


since ... | spent of my own money on _ ’s veterinary, medications, [illegible]
vaccinations, animal food, supplies...! stopped counting at $ . As | said at our

meeting, | doubt will ever be able to pay back.”

does not have any written or verbal loan agreements with the EO. has not

submitted any contemporaneous (or otherwise) documentation that substantiates that the EO was
party to any loans with its president

Transactions for Cash Withdrawals and Questionable Expenses:

During the and tax years, the EO maintained very few financial records. EO relied
primarily on its monthly bank statements to document the incoming and out-going of funds.

Stated in faxed correspondence dated February 7, that threw away all
paper documents when moved from her previous place of residence at the end of ;
further stated that does not have paper receipts of the charges (debit card and
checks).

During the initial audit interview conducted on May 25, ; stated that the EO
did not (and does not) compensate its officer and board members and the EO did not (and does
not) have any employees or compensated individuals. stated that was the live-
in caretaker for the animals; however, did not receive any compensation. stated
that during the years through , there were no loans, to or from the EO.

stated that used her personal funds to pay for EO expenses; however, did not request
any reimbursements. indicated that considered any use of her personal funds
as a gift to the EO.

Personal Business:

has stated that isa by profession. has an
business. We are unable to separate expenses from private business and the EO’s.

uses the EO’s car for private business and other personal interests.

On EO’s website/blog (see attached photo of EO’s web page) there is evidence that the EO has
commingled its exempt activities content with private business.

The public contact telephone number for business is the same telephone
number used for the EO.

www.irs.gov Page 5 of 12 Form 886-A (in lieu of)


Personal Use of EO’s Checks:
disclosed during the interview conducted on May 25, that wrote two

checks from the EO’s bank account for personal use.

• [illegible] written in the amount of $ and dated
• [illegible] written in the amount of $ and dated

stated that these two checks issued to

were for personal business expenses and not for the EO’s business. further stated that
paid personal expenses using the EO’s checks because could not find personal
checks. further stated that reimbursed the EO for the total amount of the two checks.

did not submit any documentation to agent substantiating the repayment of these
specific funds to the EO.

The EO’s bank statement reflect numerous debit card transactions for court related fees.
Stated that these expenditures were related to the EO because the EO was named ina
lawsuit. The lawsuit , Names
as the sole defendant. These court fees appear to be private
expenses.

Exhibit 1 provides a complete list of these transactions in date order. The following table
summarized these transactions by year:

expense type Reasoning _ total total
automobile need supporting records to allocate
communication need supporting records to allocate
drawings _ need supporting records to allocate
gas need supporting records to allocate
| general need supporting records to allocate
| grocery need supporting records to allocate
insurance need supporting records to allocate
legal The EO wasn't a party to the case.
legal-shipping The EO wasn't a party to the case.

www.irs.gov Page 6 of 12 Form 886-A (in lieu of)

mailbox The EO didn't have a PO box.
meals need supporting records to allocate
personal related to appraisal business
shipping need supporting records to allocate
utilities need supporting records to allocate
Total EBT for first tier tax
Cash deposits: claimed them to be personal funds
Net EBT for second tier
tax
Law

Internal Revenue Code

§501(c)(3) of the Internal Revenue Code provides for exemption from Income Tax for
corporations, and any community chest, fund, or foundation, organized and operated exclusively
for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to
foster national or international amateur sports competition (but only if no part of its activities
involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children
or animals, no part of the net earnings of which inures to the benefit of any private shareholder or
individual, no substantial part of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation (except as otherwise provided in subsection (h)), and which
does not participate in, or intervene in (including the publishing or distributing of statements), any
political campaign on behalf of (or in opposition to) any candidate for public office.

§4958(c) defines the term “excess benefit transaction” as any transaction in which an economic
benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use
of any disqualified person if the value of the economic benefit provided exceeds the value of the
consideration (including the performance of services) received for providing such benefit. For
purposes of the preceding sentence, an economic benefit shall not be treated as consideration for
performance of services unless such organization clearly indicated its intent to so treat such
benefit.

§4958(e) defines “applicable tax-exempt organization” as an organization described in either
§501(c)(3) or §501(c)(4) of the Internal Revenue Code or an organization which was so described
at any time during the five-year period ending on the date of the excess benefit transaction.

www.irs.gov Page 7 of 12 Form 886-A (in lieu of)


§4958(f)(1) defines a “disqualified person” as (A) any person who was, at any time during the five-
year period ending on the date of such transaction, in a position to exercise substantial influence
over the affairs of the organization, (B) a member of the family of a disqualified person, and (C) a
35% controlled entity.

Treasury Regulations

§1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization described in section
501(c)(3), an organization must be both organized and operated exclusively for one or more of the
purposes specified in such section. If an organization fails to meet either the organizational test or
the operational test, it is not exempt.

§1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or more
exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders

or individuals.
§1.501(c)(3)-1(d)(3)(i) defines the word “educational”, as used in §501(c)(3) of the Code, as —

(a) The instruction or training of the individual for the purpose of improving or developing his
capabilities; or

(b) The instruction of the public on subjects useful to the individual and beneficial to the
community.

§1.501(c)(3)-1(e) states that an organization may meet the requirements of section 501(c)(3)
although it operates a trade or business as a substantial part of its activities, if the operation of
such trade or business is in furtherance of the organization's exempt purpose or purposes and if
the organization is not organized or operated for the primary purpose of carrying on an unrelated
trade or business, as defined in section 513. In determining the existence or nonexistence of such
primary purpose, all the circumstances must be considered, including the size and extent of the
trade or business and the size and extent of the activities which are in furtherance of one or more
exempt purposes. An organization which is organized and operated for the primary purpose of
carrying on an unrelated trade or business is not exempt under section 501(c)(3) even though it
has certain religious purposes, its property is held in common, and its profits do not inure to the
benefit of individual members of the organization.

§1.501(c)(3)-1(f)(2)(i) states that, regardless of whether a particular transaction is subject to excise
taxes under section 4958, the substantive requirements for tax exemption under section 501(c)(3)
still apply to an applicable tax-exempt organization described in section 501(c)(3) whose
disqualified persons or organization managers are subject to excise taxes under section 4958.

www.irs.gov Page 8 of 12 Form 886-A (in lieu of)


Accordingly, an organization will no longer meet the requirements for tax-exempt status under
section 501(c)(3) if the organization fails to satisfy the requirements of paragraph (b), (c) or (d) of
this section.

§1.501(c)(3)-1(f)(2)(ii) provides that, in determining whether to continue to recognize the tax-
exempt status of an applicable tax-exempt organization (as defined in section 4958(e) and
§53.4958-2) described in section 501(c)(3) that engages in one or more excess benefit
transactions that violate the prohibition on inurement under section 501(c)(3), the Commissioner
will consider all relevant facts and circumstances, including, but not limited to, the following —

(A) The size and scope of the organization's regular and ongoing activities that further exempt
purposes before and after the excess benefit transaction or transactions occurred;

(B) The size and scope of the excess benefit transaction or transactions (collectively, if more than
one) in relation to the size and scope of the organization's regular and ongoing activities that
further exempt purposes;

(C) Whether the organization has been involved in multiple excess benefit transactions with one or
more persons;

(D) Whether the organization has implemented safeguards that are reasonably calculated to
prevent excess benefit transactions; and

(E) Whether the excess benefit transaction has been corrected (within the meaning of section
4958(f)(6) and §53.4958-7), or the organization has made good faith efforts to seek correction
from the disqualified person(s) who benefited from the excess benefit transaction.

In Joan Farr f.k.a. Joan Feffington vs. Commissioner, (TC Memo 2018-2), the United States Tax
Court upheld the Internal Revenue Service’s determinations in the notice of deficiencies pursuant
to IRC section 4958.

Government’s Position

EO’s earnings have inured, in substantial part, to the benefit of . This violates
§1.501(c)(3)-1(c)(2) of the Treasury Regulations, and warrants revocation of EO’s 501(c)(3)
status. was in a position of complete financial control during the years under
examination. Because of this control, could use EO’s debit card and its cash to pay

personal expenses. did so on numerous occasions during and

has stated that was not compensated by the EO. Furthermore, stated that
there were no loan agreements between and the EO. Therefore, all checks, cash withdrawals,
and debit card purchases that benefited constitute inurement to

www.irs.gov Page 9 of 12 Form 886-A (in lieu of)

Interaction with Section 4958 of the Code
The EO, having been recognized on August 27, as an organization described in §501(c)(3)

of the Internal Revenue Code, and remaining so recognized through the date of this report, is an
“applicable tax-exempt organization,” as contemplated by §4958(e) of the Code.

is the founder and President of EO. writes and signs checks drawn on EO’s
bank account. is an officer of, and exercises substantial influence over the affairs
of EO, and therefore meets the definition of a “disqualified person” as contemplated by §4958(f)(1)
of the Code.

indicated that is a volunteer, and that was not to be compensated by the
EO. was not issued either Forms W2 or 1099 by the EO. There was thus no
intent by EO to treat any economic benefit to as compensation. Therefore, per

§53.4958-4(c)(1) of the Treasury Regulations, any economic benefit that received from EO is
an automatic excess benefit transaction. All of the transactions itemized in Exhibit 1 represent
economic benefit to , and are thus all excess benefit transactions.

Following is a discussion of the five factors contemplated in §1.501(c)(3)-1(f)(2)(ii) of the Treasury
Regulations for revoking 501(c)(3) status on the grounds of inurement when the inurement also
constitutes excess benefit transactions (“EBTs”):

Factor #1: Size and scope of exempt activities before and after EBTs

Revocation is being proposed primarily on the grounds of inurement, and secondarily on the
grounds of EO’s activities’ qualification for 501(c)(3) status.

would not provide the IRS with the addresses ( and volunteers) where
States that the EO’s animals are currently housed and cared for. stated that

. Since, the auditing agent has not able to tour the EO’s
places of business. Agent has been unable to observe the EO’s daily business activities or
physically verify the EO’s non-cash assets, such as animal enclosures. Agent is unable to confirm
the size and scope of the EO’s exempt activities

Factor #2: Size and scope of EBTs in relation to size and scope of exempt activities

During , the EBTs were numerous and frequent. The $ of gross
inurement detailed in this report is a significant amount of inurement; particularly for an

www.irs.gov Page 10 of 12 Form 886-A (in lieu of)

organization that generates less than $ in revenue per year. Considering that a substantial
amount of the EO’s revenue was used for private purposes, the amount of

revenue available for use by the EO for exempt activities pales in comparison. Therefore,
consideration of this second factor weighs in favor of revocation.

Factor #3: Multiple EBTs

As shown in Exhibit 1, there were numerous transactions during the tax years that
constitute both inurement and EBTs. EBTs were thus not isolated or infrequent. Consideration of
this third factor then also weighs in favor of revocation.

Factor #4: Whether safeguards have been implemented

The transactions constituting inurement and EBTs were routine and continuous. This suggests a
complete absence of any internal controls or safeguards, with the most glaring absence being that
of an independent governing body. ability to write checks, sign checks, and use
EO’s debit card is evidence of having unfettered control of EO’s finances. This condition
allowed these transactions to occur.

No safeguards have been implemented. It should be noted that the EO’s governing body
consisting only of and one other person. Despite the EO having one other officer
besides ; maintains sole control of the EO’s financial affairs. If the
EO implemented any safeguards, there are not enough disinterested person on the governing
body to enforce them. Consideration of this fourth factor therefore also weighs in favor of
revocation.

Factor #5: Whether the EBTs have been corrected

Of the $ of EBTs and gross inurement that occurred during and ,$ are
cash deposits to EO’s bank account that claimed them to be personal funds, as
of the date of this report. This leaves $ of net inurement and uncorrected EBTs. This
amount alone warrants revocation of EO’s 501(c)(3) status.

For the purposes of considering this fifth factor, considering unfettered control of
EO’s finances, there is little significance to the transfer of money from account to

EO’s. The money in EO’s bank account has been no less at risk of being used by
than has any other money. For this reason, consideration of this fifth factor weighs more in favor
of revocation.

www.irs.gov Page 11 of 12 Form 886-A (in lieu of)


Summary
The $ of net inurement detailed in this report is a significant amount of inurement:
particularly for an organization that generates less than $ in revenue per year. This puts

EO in violation of §1.501(c)(3)-1(c)(2) of the Treasury Regulations, and warrants revocation of its
exempt status under Code §501(c)(3). Given the routine and continuous nature of the inurement
throughout and , revocation is proposed effective January 1,

Taxpayer’s Position

The taxpayer’s position is not known at this time.

Conclusion

EO’s net earnings have inured, in substantial part, to the benefit of its founder and President,
. This violates §1.501(c)(3)-1(c)(2) of the Treasury Regulations, and warrants revocation

of EO’s 501(c)(3) status effective January 1, . Form 1120, U.S. Corporation Income Tax
Return, should be filed for , , and each year thereafter if EO remains subject to federal
income tax.

www.irs.gov Page 12 of 12 Form 886-A (in lieu of)